Monday, April 13, 2009

The most successful of the current crop of microcurrencies is GoldMoney, a 21st-century take on the oldest financial trick in the book.

When a retired Florida oncologist named Douglas Jackson launched the world’s first digital-gold currency in 1996—an online payment system fully backed by precious metal reserves and marketed under the brand name e-gold—he did not appear to be on the winning side of monetary history. Once upon a time, nearly a hundred years before, the gold standard reigned supreme: A dollar bill or a pound note or any other major currency was in those days just a marker for a fixed amount of government gold, redeemable at any time. But by the onset of the Depression, the economist John Maynard Keynes had declared the gold standard a “barbarous relic,” too crudely physical a form of money for the complex demands of modern economies. And by the century’s end, the multitrillion-dollar global money supply had long since shed its ties to gold or any other tangible asset in particular and now resided almost wholly in the digital circuitry of financial networks. Money had gone virtual, and reattaching it to gold made as much historical sense, it seemed, as instant-messaging by pigeon post.

But now, a decade into the emergence of a fledgling digital-gold currency industry, the idea is looking trendier than ever. Just last month a slick new digital-gold app for the iPhone shipped, allowing holders of GoldMoney—a gold-backed currency, with over $631 million worth of bullion in its London and Zurich vaults—to touch their iPhone screens and instantly transfer as little as a centigram of gold (about $0.30 worth) to other GoldMoney users. But more than the latest gadgetry, of course, it’s the latest economic news that’s making gold currency look smart again. In the blink of a business cycle, the wonders of floating currency have given way to the horrors of the credit crunch—the collapse, at last, of the boom years’ towering edifice of mortgage pools, default swaps, and other so-called synthetic securities—while the price of gold holds steady at historic highs approaching $1,000 an ounce.

Even at that price, insists GoldMoney’s founder, James Turk, “Gold is still relatively cheap.” Like many gold bugs, Turk believes the market price has a lot of climbing to do before it catches up with gold’s true value—which he calculates to be as much as $6,200 an ounce—and he’s not surprised that most of GoldMoney’s initial growth has come from customers looking mainly for a safe and simple way to invest in a debt-free, low-risk store of value.

Turk is just fine with GoldMoney’s investor appeal, because it allows GoldMoney to closely monitor the transactions that people use it for. As e-gold’s Douglas Jackson can attest, rolling your own currency can be a risky business: Having swiftly built up a base of over 5 million account holders drawn to e-gold both for its liquidity and its less-than-rigorous customer-identification policies, Jackson and other e-gold principals were hit with a federal indictment in April 2007 alleging that the currency was, as a Justice department statement put it, “a highly favored method of payment by operators of investment scams, credit card and identity fraud, and sellers of online child pornography.” Last summer the defendants pleaded guilty to money laundering and related charges, and while they were spared prison time, e-gold itself has for the time being been put on ice: The currency, which once circulated at “velocities” of over $2 million in payments per day, has effectively been shut down until Jackson and company can bring it up to regulatory code.

The legitimate users of gold-backed e-currencies see them as part of a hybrid monetary future: Digital gold’s unique efficiencies as a payment system make it particularly suited to international transactions. Gold-backed cash automatically evens out currency fluctuations that can play havoc with price points and profit margins in cross-border trade. Already GoldMoney allows for faster, cheaper online transfers of funds than the existing banking system does—particularly from one country to another, where standard bank wire fees of $20 or more look almost prohibitive next to GoldMoney’s maximum transfer fee of about $3.

But even the most avid goldbugs aren’t happy to contemplate what it would take to lead all the world’s floating currencies back to the rigors of the gold standard. “I don’t think we could go back to that,” says Mahendra Naik, a director of Iamgold, a gold mining company. “The world has evolved quite considerably, it’s quite developed.” On the other hand, he points out that “if you keep printing money, sooner or later people lose faith.” In Zimbabwe, for example, the nation's reserve bank just issued the new $100 trillion bill, rendering Zimbabwe’s legal tender, in the words of the country's own finance minister, “essentially dead.”

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About Me

I am an e-Money researcher and a Founding Director of the Bitcoin Foundation. My career has included senior influential posts at Sumitomo Bank, VISA, VeriSign, and Hushmail.

"Free-market protagonists, such as Matonis, regard cybercash as better than traditional government-issued or -regulated money, because it is determined by market forces and thus nonpolitical in nature." --Robert Guttmann, Professor of Economics at Hofstra University, in Cybercash: The Coming Era of Electronic Money, 2002

"Matonis is quite correct that the new technology makes easier the use of multiple private currencies." --Mark Bernkopf, Federal Reserve Bank of New York, in "Electronic Cash and Monetary Policy", 1996

"Matonis argues that what is about to happen in the world of money is nothing less than the birth of a new Knowledge Age industry: the development, issuance, and management of private currencies." --Seth Godin in Presenting Digital Cash, 1995